Saturday, November 15

A View On The Collapse

In Greed We TrustI've heard a lot of politically motivated talk about the global financial crisis. There are some who'd like to place all the blame at the feet of a couple of government programs.

However, I'd like to highlight one of the factors that I consider important. It tangentially deals with the issue of regulation.

The reason for our crisis can be put down to one simple word. Greed!

It was reckless greed when the rating agencies, having no clue how to rate the mortgage derivatives simply declared them as AAA and accepted their payment for assigning a rating.

It was greed when the banks originating mortgages created incentives for closing deals and then turned a blind eye on how these mortgages were actually structured when sold to end consumers.

It was greed when credit default swaps, an unregulated financial vehicle which serves the same function as regulated insurance, were sold with the assumption that housing prices would never go down, such that there was no need to maintain reserves for defaults on the loans they insured.

It was greed when unsophisticated purchasers didn't look closely enough at the terms of their deals and they thought they were getting a great deal on their mortgage from the banks when they weren't.

It was greed when the fat cats at the top made huge profits on this process, especially when at some point they actually knew how and why housing defaults were increasing but they continued to milk the process for all it was worth.

It was greed when banks, pension funds, and investors around the word saw great supposedly low-risk AAA rated mortgage derivatives and snapped them up without looking into them deeply enough to determine that they were risky.

It was greed when the fat cats mentioned above used their offshore accounts to sell their own companies short when they knew the bottom was going to fall out. I don't have any proof of this, but I'd very surprised if it didn't happen.

The result, greed has taken a toll on the global financial system and in the process hurt the average North American consumer. Billions have been sucked out of their pensions and investments. Billions.

So, where does this leave us. Am I against free markets? Not at all. Am I against capitalism? Not at all. Personal and corporate financial motivation is certainly an appropriate decision making mechanism. However, greed is a very powerful force, and some level of wise regulation needs to be in place if we are to maintain an environment safe for the average working family.